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China Tightens Monetary Policy by Raising Repo Rates
Move to tighten rates on reverse repurchase agreements follows MLF rate increase
By SHEN HONG
Updated Feb. 3, 2017 2:13 a.m. ET
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SHANGHAI—China’s central bank raised key interest rates in the money market Friday, reinforcing a shift toward tighter monetary policy aimed at deflating asset bubbles and reducing long-term financial risk.
The latest effort by the People’s Bank of China follows a similar decision shortly before the weeklong Lunar New Year holiday to increase the borrowing cost on special loans to a select group of commercial lenders, a move widely interpreted as an effective policy interest-rate increase.
In its daily money-market operation, the PBOC raised the interest rates it charges commercial banks on the seven-day, 14-day and 28-day loans, also known as reverse repurchase agreements or repos, each by 0.1 percentage point.
The central bank had kept the benchmark seven-day repo rate unchanged at 2.25% since October 2015, before pushing it up to 2.35% Friday.
Mr. Liu was referring to the PBOC’s surprise decision on Jan. 24 to raise the borrowing costs on loans to 22 financial institutions via the so-called medium-term lending facility, special loans ranging from six months to one year that were designed as a fresh liquidity tool in 2014.
“There are no longer any illusions about the authorities’ intention. We are looking at a neutral to slightly tight monetary policy now,” Mr. Liu said.
The PBOC has also continued to withdraw cash from the financial system. Using Friday’s liquidity operation, the central bank drained a net 70 billion yuan ($10.17 billion) from markets, repeating the same exercise for the fifth consecutive trading day.
The central bank injected a record 1.13 trillion yuan into the money market ahead of the Lunar New Year break on Jan. 28 to meet a seasonal surge in demand for cash. But it has since dialed back its liquidity easing, signaling an effort to prevent markets from reading the one-off pump priming as policy loosening.
“The MLF rate hike basically set the tone and today’s follow-up move has reinforced Beijing’s message that it’s determined to cut the high leverage in financial markets and pre-empt systemic risk,” said Zhu Chaoping, China economist at UOB Kay Hian Holdings Ltd., a Singapore investment bank.
‘If the rate hike on the MLF was the first gunshot, the move today has made the policy picture very clear now.’
—Liu Dongliang, senior economist at China Merchants Bank
Chinese shares and bonds fell in response, as the PBOC’s move has further raised the cost of the type of speculative investment that has thrived in the past three years on cheap, easy money.
The benchmark Shanghai Composite Index fell 0.6%, while the yield on the 10-year Chinese government bond rose 0.06 percentage point to 3.41%, the highest level since Dec. 20.
The reaction in China’s money markets was more muted. The benchmark seven-day repo rate fell 0.14 percentage point to 2.50% despite the news, in a sign that Friday’s rate increase wasn’t a total surprise.
Chinese leaders have repeatedly vowed to rein in debt-fueled speculative investment that has inflated prices in the past year for everything from bonds to iron ore and garlic, developments that are deemed to be feeding long-term financial risk into the world’s second-largest economy.
However, the authorities have increasingly demonstrated a preference for using short-term measures rather than blunter instruments such as policy interest rates.
China’s official policy interest rates remain the one-year lending and deposit rates, instruments that are increasingly considered ineffective due to their long duration and the insensitivity toward borrowing costs among China’s dominant state-run firms.
The Chinese currency’s recent rebound against the U.S. dollar and signs that capital outflows from the country have started to ease also give Beijing more room to tighten its policy, economists say.
“If money continues to leave China, you actually need to put more cash into markets so as to avoid a liquidity crunch,” said Mr. Zhu.
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